THE NEW TAX LAW: What Businesses Can Expect

The question we hear most from domestic business owners about the TCJA is, “How much will IRC Section 199A 20 Percent Pass-Through Deduction lower my tax liability in 2018?”

Does TCJA affect the sale of a closely- held business?

TCJA includes changes that both sellers and buyers should consider.

Before TJCA, the maximum combined federal tax rate for the selling corporation/shareholder was just over 50%. TCJA reduced the maximum to 39.8% by reducing the corporate tax to a flat 21%. This makes an actual or deemed asset sale less expensive from the seller’s perspective. It may also induce a buyer to agree to gross-up a seller for any additional tax arising out of an asset deal.

TJCA reduced the maximum tax rate on ordinary income recognized by an individual from 39.6% to 37%, while increasing the taxable income threshold at which this rate applies.

For S corporation shareholders or individuals members of partnership/LLCs, ordinary income generated on an asset sale – including depreciation recapture, interest on deferred payments of purchase price, rent paid for the use of property retained by the seller/owner, amounts paid to the seller/owners as compensation or for a non-compete – will be taxed at the reduced rate.

Any adverse changes for sellers?

TCJA limits a taxpayer’s loss carryover deduction to 80% of the taxpayer’s taxable income for the year; thus, a seller’s NOLs may not offset some of the gain from the sale.

What does TCJA do for buyers?

TCJA eliminates the previous two-year carryback but allows the NOLs to be carried forward indefinitely. It limits the carryover deduction for a taxable year to 80% of the taxpayer’s taxable income for such year.

TCJA extended and modified the additional first-year depreciation deduction for qualifying property through 2026, increased the allowance from 50% to 100% of the adjusted basis for property placed in service before January 1, 2023, and removed the requirement that the qualifying property’s original use must commence with the taxpayer.

Any negatives for the buyer?

TCJA generally limits deduction for business interest incurred or paid by a business to 30% of the business’s “adjusted taxable income” for a tax year. Interest deduction so disallowed is carried for- ward indefinitely.

For a buyer who incurs indebtedness to purchase a target company, this limitation on deducting interest on such indebtedness could make the acquisition more expensive.

In general, the limitation won’t apply to a corporation if its average annual gross receipts for the preceding three-taxable- year period does not exceed $25 million.